GBP/USD is currently positioned in the mid-1.34s to 1.35s range, having struggled to surpass the recent swing high close to 1.3535. On the short-term chart, GBP/USD is positioned slightly above the 50-EMA at approximately 1.3470, while more substantial structural support can be found near the 100-EMA around 1.3340. Provided that the 1.3410–1.3470 range remains intact, any declines towards 1.34 are viewed as opportunities to buy, rather than indicators of a new downtrend. The price structure from the autumn lows continues to exhibit a series of higher lows, indicating a gradual movement toward 1.36 instead of a decline back to 1.33. The backdrop for the dollar is evidently deteriorating. The dollar index is currently positioned between 97.9 and 98.1, having rebounded from a low of 97.74. However, upward movement is constrained by the 100-EMA, which is situated near 98.70. That indicates rallies in USD are being sold, not pursued.
Futures markets indicate that there are expectations for at least two U.S. rate cuts in 2026, with projections suggesting the policy rate will shift from the existing 3.50–3.75% range to approximately 3.00–3.25% in the coming year. The likelihood of an initial rate cut by March 2026 is estimated to be over 75–85%, presenting a distinct medium-term challenge for the USD while favorably impacting GBP/USD in a structural sense. The U.S. central bank has implemented three rate cuts since September, reducing the federal funds range approximately 100 basis points below its anticipated peak for 2024, now positioned around 3.50–3.75%. The latest Non-Farm Payrolls report indicated stronger-than-anticipated job creation, which provided a temporary boost to the dollar. However, market attention is now directed towards the overall yearly trend: a decline in growth momentum, a cooling labor market relative to early 2025, and a central bank that is already deep into an easing cycle. The regime has transitioned from “higher for longer” to “controlled normalization”, and this gradual erosion of USD carry serves as a crucial support for GBP/USD. The VIX index has decreased to approximately 11.5, approaching its 52-week low, resulting in a contraction of options premiums across equities and foreign exchange. Inexpensive volatility is promoting call-option purchases on U.S. indices like the S&P 500, with certain firms suggesting a target of 8,000 points by 2026. A backdrop of a soft-landing narrative, U.S. GDP growth around 2.1% in Q3 2025, and low volatility generally corresponds with a weaker dollar instead of a defensive USD demand. The combination indicates potential for an increase in GBP/USD, rather than a decline back to levels below 1.33. In the context of GBP/USD, inflation in the U.K. continues to exhibit greater persistence compared to the Eurozone or the U.S., with recent figures significantly exceeding the 2% target and previous data hovering around 3.2%.
Ongoing price pressures compel the Bank of England to maintain a hawkish stance, even as other institutions begin to discuss potential cuts more candidly. Communication from the BoE indicates that any easing cycle is expected to occur later and will be less pronounced than that of the Fed. The relative position has enabled GBP/USD to maintain its footing in the 1.34–1.35 range, even amidst the thin trading conditions typical of the holiday period. The retreat from 1.3535 to the 1.3480–1.3500 range represents a consolidation phase following a rally, rather than indicating a fundamental bearish reversal. Currently, GBP/USD is positioned just below 1.3500, facing immediate resistance at approximately 1.3535, followed by another level around 1.3600 should buyers regain their momentum. The initial support level is identified at the 50-EMA, positioned at 1.3470, with subsequent support at 1.3410 and a more substantial level at the 100-EMA around 1.3340. Provided the pair maintains its position above 1.3340, the medium-term trend of higher lows established from the autumn base continues to be valid, suggesting a potential retest of 1.36 and, with further dollar weakness, a possible extension towards the 1.37–1.38 range in 2026. The wider foreign exchange landscape indicates that this is mainly a dollar-driven movement, rather than solely a narrative focused on sterling. EUR/USD is currently positioned between 1.176 and 1.178, maintaining a position above the 50-EMA at approximately 1.1745 and the 100-EMA around 1.1705, steadily advancing within a rising channel, even as Eurozone growth projections hover around 1.2–1.3% for 2025–2026. Meanwhile, USD/JPY is trading close to 156.4, with the yen continuing to be a preferred funding currency.
Core Tokyo CPI in December recorded a year-on-year increase of 2.3%, falling short of the 2.5% forecast, yet it continues to exceed the 2% target. However, market sentiment suggests skepticism regarding the Bank of Japan’s swift normalization. The situation maintains a weak JPY and underscores that the underperformance of the USD is selective, with European currencies and GBP showing stronger positioning compared to JPY. Gold has retreated from its peak levels exceeding $4,500–$4,520 per ounce and is currently fluctuating within the $4,450–$4,550 range, with recent values around $4,546.94. This action appears to be profit-taking in a light holiday market, rather than indicating a structural peak, particularly as rate futures continue to reflect expectations of several U.S. rate cuts. Numerous desks view the level below $4,500 as a strategic entry point through call options, a trend that typically aligns with persistent medium-term pressure on the USD, thereby benefiting pairs such as GBP/USD. Bitcoin is currently trading in the range of $87,000 to $89,000, following ETF outflows totaling approximately $188.6 million and a decline in whale participation. The correction observed is significant, yet it does not constitute a crash. It aligns with the narrative of speculative risk assets adjusting to previous gains, rather than indicating a widespread aversion to risk. Tokyo’s core CPI stands at 2.3%, falling short of the 2.5% forecast, while Japan’s November retail trade has increased by 1.0% year-on-year, surpassing the expected 0.9%. These figures indicate an economy that is sluggish but remains stable. Despite inflation remaining elevated above target for over a year and a half, the Bank of Japan has refrained from implementing a robust tightening cycle. That maintains JPY as the favored funding leg, while higher-yielding currencies like GBP draw carry and position-taking amid any USD correction. The ongoing weakness in USD/JPY funding flows indirectly bolsters GBP/USD as it strengthens the overall pro-risk, anti-USD sentiment. The policy landscape in the Eurozone appears to be relatively stable.
The primary refinancing rate is approximately 2.15%, the deposit rate is close to 2.00%, and the marginal lending facility stands at 2.40%. Headline inflation is currently at approximately 2.2% year-on-year, a slight increase from October’s 2.1%, while services inflation stands at around 3.5%. The combination of a headline close to the target and robust services provides the European central bank with the justification to maintain its current stance throughout much of 2026. Projections indicate that Eurozone growth is expected to be approximately 1.3% in 2025 and 1.2% in 2026, with uncertainties stemming from the possibility of 10–20% tariffs imposed by the U.S. on EU goods. The outcome reflects a euro that is stable, neither experiencing significant growth nor facing severe decline. The stability of EUR/USD in the range of 1.17–1.18 provides indirect support for GBP/USD, as the overall weakness of the European currency against the USD is limited. Cross-asset flows continue to support the same narrative. U.S. equities appear set for a positive trajectory in 2026, with certain projections aiming for the S&P 500 to reach approximately 8,000, supported by AI-driven earnings, reduced policy rates, and a macroeconomic environment characterized by a “soft landing.” With the VIX hovering around 11–12 and index calls priced attractively, investors are opting to invest in equity upside instead of holding onto cash as a protective measure. In the foreign exchange market, this typically indicates a depreciating USD relative to higher-beta developed-market currencies, such as GBP, which reinforces GBP/USD maintaining levels above 1.34, even during less active trading periods.